Stocks
Stocks are the most commonly known traded asset. Even if you are a novice investor, chances are you have heard of stocks before. You may have heard the finance section of the news when they talk about stocks and what is up and what is down, what the index was doing and any news such as consumer sentiment or interest rates. Most investors usually know what stocks or shares are, but maybe not quite the finer details.
What Are Stocks?
Stocks themselves are basically a security that says you own a part of a corporation, and by doing so you are entitled to some of their assets/earnings. As an investor you are either saying that you wish to buy into a company because you believe they are going to be more profitable and you wish to receive some of their profits and their potential increase, or you just think that their price will increase and you wish to make the difference.
For you to be eligible to purchase stocks in a corporation, the corporation needs to be listed on the stock exchange. That is to say that you can’t just buy stock in your local pizza shop. Companies must go through legal processes in which they then become listed on the stock exchange as a corporation. Once they are listed on the stock exchange, they will try to raise funds buy getting investors to buy their stock.
Corporations that are entering the stock market for the first time have IPOs (Initial Public Offerings) in which the corporation attempts to raise funds through shareholders buying their stock. They will usually have a set amount that they have targeted for, however once they have raised enough funds obviously the more that buy their shares the better because this will increase their stock price.
What Is A Shareholder?
If you buy stock you are known as the shareholder. Obviously the more shares or stock you have, the more of the company you own. Each stock you purchase has a set price which fluctuates due to supply and demand. If there is more demand than supply, then the price of the stock will rise.
If there is more supply than demand the price will fall. As the price either rises or falls, there needs to be someone on the other end either buying or selling for the transaction to take place. For this reason the market does not move up in consistently straight lines. There will also be at some point, other traders which believe the price of the company will either rise or fall and they wish to enter or exit at that price causing fluctuations in the price of the stock. Obviously each individual person is highly unlikely to have have an adverse affect on the price of stock, unless of course they own an extremely large quantity of stock.
As a shareholder you are entitled to any dividends that the company might offer if you own stock at the particular time in which they are offering dividends. If you buy stock and the company’s value increases you receive some of that increase. This is why traders can make profits purely by buying and selling stock in a matter of days rather than over a period of years.
Some investors choose to buy stocks purely for the dividends they receive and the capital growth of the stock rather than trying to buy and sell to make profits. This is commonly known as a buy and hold strategy.
Trading stocks itself, is the process of picking a stock at a low price and selling it when it reaches a higher price, which will inevitably make you a profit. Or alternatively, picking a stock when it is at a high price, selling it and buying it back at a lower price. This is commonly done through either buying the stocks outright and trading the actual stock, by trading Options, or CFDs. (To learn more about buying and selling stocks see: Going Long And Short)
What Are The Risks Involved In The Stock market?
The stock market contains various different types of risk, these include
-
-International risk
-
-Overall market risk
-
-Specific stock risk
International Risk
The stock market always involves international risk. If you are an Australian investor (or from many other countries), the American economic situation will often affect your country’s stock market as this has been seen in the ‘sub-prime mortgage’ mess, and the ‘bail-out’ mess which America’s economy has suffered greatly from.
Even the election of next presidents or large company announcements can create volatility at the least in other world markets. If you are a long term investor, it is wise to educate yourself on risk reduction strategies or hedging. Be aware of what the global market is doing as well as your own country’s.
Overall Market Risk
This includes things that effect the general market such as interest rates, consumer sentiment, natural disasters, country threats, your country’s economic status etc. These factors will affect the market as a whole, and generally affect the stock in which you have invested. Overall market risk can be a great time to invest in strong companies which have no reason to have dropped in price other than overall market factors.
Specific Stock Risk
Specific stock risk includes the situation of your stock itself; whether the company has good revenue, whether the CEO of the company is making good decisions, the size of the company, how much debt the company has etc. These factors will directly affect the price of the shares as a result. Knowing the company’s financial situation and company decisions can help investors to make decisions on when to buy the stock and when to sell.
Although there is considerable risk involved in trading the stock market, it doesn’t mean that it cannot be profitable. Like any other endeavor you choose to take part in the more you educate yourself the better. Don’t jump into something that you know nothing about even if you do have a financial advisor telling you what to do.
There are many different types of trading the stock market (or any other market) as well as different strategies and techniques to lower risk or increase returns. It all depends on what you are trading and what type of trader you wish to become to what your results will be.
